UK: The Employment Appeal Tribunal (EAT) has provided important clarification on the annual leave entitlement under the Working Time Regulations 1998 (WTR) of workers (including employees) who are off work on long-term sick leave.

In the case of Fraser v Southwest London St George’s Mental Health Trust, the EAT has decided that:

• a worker on long-term sick leave must request annual leave in line with the requirements of the WTR in order to be entitled to be paid for it;
• a worker is entitled to be paid in lieu of accrued but untaken holiday when employment terminates, but only in respect of leave accrued during the leave year in which employment terminates. Accrued but untaken annual leave from previous leave years does not carry forward for the purposes of the payment in lieu entitlement where no request to take such leave was made by the worker; and
• there is no duty on the employer to make a worker aware that the WTR rules operate in this way.

The decision provides welcome clarification to employers facing holiday-pay claims from workers on long-term sick leave on how to calculate annual leave. It is now clear that such workers are not entitled to be paid unless they requested annual leave during the relevant leave year. The EAT commented that it may seem artificial for an employee who is not at work to have to give notice in this way, but in the EAT’s view that “merely reflects the artificiality of a period of long term sickness counting as holiday at all”.

Statutory annual leave – key principles

Following the EAT’s decision, the annual leave entitlement under the WTR for workers off work on sick leave can be summarised as follows:

• All workers are entitled to a period of 5.6 weeks’ statutory annual leave for each leave year.
• A worker who is off work on sick leave continues to accrue annual leave during their sick leave period and is entitled to elect to take annual leave during their sick leave period.
• A worker on long-term sick leave must request to take annual leave in line with the requirements of the WTR in order to be entitled to be paid for it. If no election to take annual leave is made during the leave year (or the election does not comply with the notice provisions of the WTR), no entitlement to be paid arises, unless perhaps there are circumstances in which the employee was unable to make the request.
• On termination of employment, an employer must make a payment in lieu of accrued but untaken annual leave to the worker for the leave year in which the worker’s employment terminates. The worker is not entitled to be paid in lieu of accrued but untaken annual leave for previous annual leave years where no request to take annual leave was made by the worker during the leave year, unless perhaps there are circumstances in which the employee was unable to make the request.
• The situation is more complex where the worker requests leave but wishes to defer the period of annual leave until they are well enough to return to work. Provided the worker has given notice to take annual leave in accordance with the WTR, if there is insufficient time for the worker to take the leave upon return to work before the end of the current leave year, the employer might be obliged to permit the employee to carry over that leave into the next leave year. If employment terminates before the leave can be taken, the worker is likely to be entitled to payment in respect of that carried forward annual leave on termination. Definitive guidance on these points is still required.
• There is no duty on the employer to make a worker aware of their right to request annual leave whilst on sick leave.

The summary above demonstrates that the WTR rules on the annual leave entitlement of workers off work on long term sick leave involve a number of artificial distinctions that are difficult to justify. Further, the complexity of the rules creates confusion as regards what to pay a worker in respect of their accrued but untaken annual leave on termination of employment.

Two further issues add to the complexity of what is becoming a fiendishly difficult area of law. First, the WTR only regulate a worker’s statutory annual leave and pay entitlements under the WTR. Of course, in practice many employers provide annual leave entitlements in excess of the WTR minimum requirements either under the contract of employment or via a collective agreement. Therefore, a distinction must be drawn between WTR annual leave entitlements and any “additional” annual leave entitlement where the question of carry forward and payment in lieu is determined by looking at what was agreed between the parties.

Secondly, the WTR represent the UK Government’s implementation of the EU Working Time Directive. Therefore, the question of whether the WTR rules are consistent with the requirements of the Working Time Directive is also relevant. The ECJ case of Pereda decided that the Working Time Directive requires that annual leave can be carried forward to the next holiday year if there is insufficient time for the employee to take that holiday on return to work from a period of sick leave. However, that position is incompatible with the WTR because the WTR expressly prohibits annual leave being carried forward. The question as to whether an employee is entitled to carry forward indefinitely under the Working Time Directive is currently subject to scrutiny in the ECJ case of KHS AG v Schulte C-214/10 where the Advocate General has already given her opinion that allowing workers to carry forward annual leave over several years would not achieve the Directive’s health and safety purpose of enabling workers to rest and recuperate. The ECJ is not obliged to follow the Advocate General’s opinion but often does do so. Furthermore, the UK Government has proposed in its “Consultation on Modern Workplaces” to address this issue and the Government’s response is now awaited. In the meantime, employers are left having to track the latest guidance from the UK courts.

Due the complexities of the WTR and the current state of the law, a fuller analysis of the EAT’s decision in Fraser v Southwest London St George’s Mental Health Trust follows below:

What happened in this case?

Miss Fraser, the Claimant, was a nurse working for the South West London St George’s Mental Health Trust (the “Trust”). In November 2005, she injured her knee at work and went off sick. Her sick pay expired after nine months, in August 2006. She was dismissed in 2008 after being off sick for a large amount of the time following her injury. On her dismissal, the Trust paid her in lieu of untaken leave in the final year of her employment but nothing in respect of the two previous leave years. Miss Fraser brought a claim in the Employment Tribunal for unpaid holiday pay for those two previous leave years. The Tribunal decided that Miss Fraser was not entitled to holiday pay for those previous holiday years as she had not given notice to the Trust of her intention to take leave during those holiday years, as required by Regulation 15 WTR. The Tribunal said that Miss Fraser had not produced any evidence to the Tribunal to show that she was unable to take leave during her sickness. Miss Fraser appealed. The EAT agreed with the Tribunal and dismissed Miss Fraser’s appeal.

The EAT considered the rules contained in the WTR:

• Leave may only be taken in the leave year in respect of which it is due and may not be replaced by a payment in lieu except on termination (Regulation 13(9)).
• On termination, a worker has a right to pay in lieu of leave not used (Regulation 14).
• A worker may take leave on days he or she elects by notice to the employer (Regulation 15).
• A worker has the right to be paid for annual leave taken (Regulation 16).
• A worker may complain to an Employment Tribunal where the employer has refused to grant leave on request, or make a payment in lieu on termination (Regulation 13).

The EAT considered first whether it was a condition of her entitlement to holiday pay that Miss Fraser should have formally given notice under Regulation 15.

It was argued on behalf of Miss Fraser that it did not matter that she had not formally “taken” her annual leave by serving the appropriate notice – all that mattered was that she was entitled to it. This argument followed the previous EAT case of List Design, as endorsed by another case of Canada Life (which was a case where employment had terminated and the employee was entitled to claim in respect of previous holiday years).

The EAT ruled that both these cases were wrongly decided. It said that the purpose of the WTR is for employees to take full annual leave in the interest of health and safety. If they are paid instead of actually taking the leave, there would be an incentive not to take it. It cannot therefore be right for employees to receive holiday pay for leave they have never taken. This concurs with the EAT in Kigass where the EAT held that an employer must pay the employee for each week of leave actually taken.

The EAT concluded that Miss Fraser’s entitlement to holiday pay under Regulation 16 depended on her having given proper notice under Regulation 15 of her intention to take annual leave. The EAT commented that it may seem artificial for an employee who is not at work to have to give notice in this way, but that “merely reflects the artificiality of a period of long term sickness counting as holiday at all”.

The EAT said their decision was consistent with the European cases on this issue. It is clear from European Court decisions that an employee off work as a result of sickness has a choice, either to take annual leave during their sick leave or to ask for it to be deferred to a later period (Pereda). If Miss Fraser had made a request to defer her holidays accruing in her years off sick to a later date when she recovers, the Trust might have had to allow her to take such holidays upon her recovery, and if she had not had the chance to take that holiday before her dismissal, it might be necessary to read into Regulation 14 an entitlement to payment in lieu.

Miss Fraser also argued that the Trust was under an implied contractual duty to inform her of her right to request annual leave whilst absent on sick leave. She argued that, following the case of Scally v Southern Health and Social Services Board (1992), there is an implied obligation on employers to inform employees of a contractual benefit. The EAT distinguished this case, saying that Scally involved a collectively negotiated contract, whereas in the present case the entitlement arose as a matter of general law. The EAT held that except in particular circumstances, the general law did not place any duty on an employer to advise its employees of their rights.